Eighth Circuit reverses district court, finds regulations are valid

The Eighth Circuit held that the regulations were valid “but only in part.”

The Eighth Circuit held that the regulations were valid “but only in part.”

The U.S. Court of Appeals for the Eighth Circuit today reversed and remanded a federal district court’s decision that had found requirements in regulations defining an “educational organization” to be invalid.

The Eighth Circuit held that the regulations were valid “but only in part.”

The case is: Mayo Clinic v. United States, No. 19-3189 (8th Cir. May 13, 2021). Read the Eighth Circuit’s decision [PDF 123 KB] that includes a concurring opinion.


The taxpayer is a Minnesota nonprofit corporation and tax-exempt organization that is the parent organization of several hospitals, clinics, and a college of medicine and science.

After conducting an audit, the IRS asserted in 2009 that the taxpayer owed tax on certain income it received from partnerships because it was not an educational organization described in section 170(b)(1)(A)(ii) and therefore was not entitled to an exception in the unrelated debt-financed income rules available to those “qualified organizations.”

Specifically, applying two tests from the applicable regulation, the IRS determined that (1) the taxpayer’s primary function was not the presentation of formal instruction, and (2) its non-educational activities were more than merely incidental to its educational activities.

The taxpayer filed an action in a federal district court.

The federal district court in August 2019 granted summary judgment for the taxpayer, on a determination that the taxpayer was an “educational organization” and therefore qualified for an exception in the unrelated debt-financed income rules and was entitled to an $11.5 million refund of UBIT paid in prior years. The federal district court further concluded that because Congress did not include a primary-function requirement in the relevant statute, Treasury exceeded its authority by including such a requirement in the regulations.

Read TaxNewsFlash

Eighth Circuit

The Eighth Circuit today concluded that the regulations were valid, but only in part, and that application of the statute as reasonably construed by the regulations to the taxpayer’s tax years could not be determined as a matter of law by summary judgment.

The Eight Circuit agreed with the district court that Reg section 1.170A-9(c)(1) “adds unreasonable conditions to the statutory requirement,” but only by limiting “educational organizations” to those principally providing “formal instruction.” By contrast, the terms “primary function” and “merely incidental” activities in the regulation “have a valid role in interpreting the statute,” the Eighth Circuit concluded. More specifically, the appeals court noted that, to qualify as an “educational organization” within the meaning of section 170(b)(1)(A)(ii), an organization’s primary purpose must be “educational” and its noneducational activities must be merely incidental to that primary purpose.

The Eighth Circuit observed that the question whether the taxpayer is an educational organization is a mixed question of law and fact—one that neither party directly addressed on appeal. Hence, the case was remanded to the lower court to determine whether the taxpayer’s primary purpose is educational.

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 8817 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com



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